Parkway Life Reit stays upbeat as Q3 DPU rises 12%

PARKWAY Life Reit yesterday reported distribution per unit (DPU) of 1.91 cents for the third quarter to Sept 30, up 12.1 per cent from 1.71 cents in the equivalent period last year.

Income available for distribution was $11.6 million, up from $10.3 million last year.

Annualised DPU was 7.65 cents for a 6.59 per cent yield, based on Parkway’s closing price on Sept 30, up from 5.9 per cent last year; or 6.32 per cent based on yesterday’s closing price of $1.21 a unit. For the three months ended June, the Reit posted a 13.7 per cent increase in income available for distribution to $11.4 million, for a DPU of 1.89 cents.

For the third quarter, gross revenue rose 23.6 per cent year-on-year to $16.5 million, from $13.3 million. Net property income was $15.4 million, up from $12.5 million.

For the first nine months, distributable income was $34.3 million, up 14.1 per cent, for DPU of 5.69 cents, up from 5 cents last year.

Chief executive officer of the Reit’s manager Yong Yean Chau said: ‘Despite the challenging market conditions, we continue to enjoy strong growth quarter after quarter.

‘We remain committed to sharpening our focus on investment and asset management and seek to execute on timely acquisition opportunities at the appropriate time, to take PLife Reit to its next level of growth.’

Parkway Life owns the Mount Elizabeth, Gleneagles, and East Shore hospitals in Singapore, and 10 assets located in Japan, including nursing homes and a pharmaceutical product distributing and manufacturing facility.

Yesterday, Parkway said it was issuing 272,262 new units to its manager Parkway Trust Management, at an average price of $1.11 as payment of 20 per cent of the manager’s fees for the third quarter.

‘While there have been positive signs of an economic recovery, we believe that there are still uncertainties in the market.

‘However, given the defensive nature of PLife Reit and the fact that 96 per cent of our total portfolio has downside revenue protection, we remain optimistic about our growth in the medium to long term,’ said Mr Yong.

Within expectations, and we like it

Parkway Life REIT (Plife) reported gross revenue for 3QFY09 of $16.5 million (+23.6% y-o-y, +2.5% q-o-q)), net property income (NPI) was $15.0 million (+23.3% y-o-y, +2.7% q-o-q). Distributable income was $11.6 million (+12.1% yo-y, +1.6 q-o-q). DPU for the quarter was 1.91 cents (+11.7% y-o-y, +1.1% q-o-q).

The financial results came in within expectations, and we think that is a good sign. To recall, Plife completed acquisition of the Japan properties in Sep 2008, therefore there were noticeable increase in revenues from 4QFY08 onwards. From 4QFY08, quarterly revenues were relatively stable, a reflection of the stability of the underlying healthcare related assets. DPU has also been on the incline with a consistent distribution margin around 0.7 level. The annual rent increment of 4.36% of the Singapore hospitals kicks-in in August 2009 and coupled with the increase in rental from the asset enhancement carried out on a Japan property, these will provide the impetus for growth in revenue in the next quarter.

On the capital management front, Plife’s gearing is 23.2% with total debt of $249 million. $34 million denominated in SGD is due in 2H2010 while the rest is denominated in JPY and due in 2011. Refinancing is not a major concern as Plife has already gotten funding facilities in place through a $50 million credit facility and also a $500 million MTM program.

Valuation and recommendation. We make no changes to our projections and maintain our optimism in the REIT. We have a FY09F DPU forecast of 7.59 cents, which translate to a dividend yield of 6.27%. We believe Plife is on track to meet our forecast and may even surprise slightly on the upside. We maintain our fair value of $1.37and Buy recommendation.

A stable set of results

At a Glance

• 3Q09 NPI of S$15.4m within expectations
• DPU of 1.91 Scents; ex-date on 11 Nov
• Acquisitions to aid growth could materialize in near term, in our view
• Retain Buy, TP S$1.37.

Comment on Results

3Q09 within expectations. 3Q09 net property income (NPI) grew by 23.2% to S$15.4m, driven by contribution from its Japan properties, which were acquired in Sep’08. Additionally, PREIT also saw higher rental from its Singapore hospitals due to the growth in minimum rent to S$52.7m in the 3rd year of lease (23 Aug 09 – 22 Aug 10), which increased by 4.36% based on the 1%+CPI growth rate rental calculation methodology.

DPU of 1.91 Scents. DPU grew by 11.6% yoy in 3Q09 to 1.91 Scents and up marginally from 1.89 Scents in 2Q09. Ex-date is 11 Nov and payable on 14 Dec.

Gearing remains at 23.3%, good debt headroom. PREIT’s gearing remains low at 23.3%, which allows for additional debt of S$301.3m and S$989.8m before it reaches 40% and 60% gearing respectively. Available sources of funds remains diversified ranging from a S$500m MTN facility, S$126m untapped bank facilities and S$50m 3-year revolving Murabaha facility.

Recommendation

Stable growth with acquisitions. As per our report on 24 Sep 09 (Poised to acquire), we still continue to expect management to deliver acquisitions in the near term, to further enhance growth, which will be funded via debt.

Retain Buy, TP unchanged at S$1.37. We retain our recommendation, in view of its defensive features (96% of total portfolio with downside rental protection), upside rental growth with CPI-linked revisions and opportunity for growth via acquisitions. Our TP is S$1.37 based on DCF (WACC 6.6%).

Factoring in acquisitions

• Maintain Outperform; target price raised to S$1.49 (from S$1.31). We have increased our target price for PLife to S$1.49 from S$1.31, still based on DDM valuation (discount rate 7.2%). We now assume S$250m worth of acquisitions in 2010 (from zero previously). We also increase our cost-of-debt assumption to 3.5% from 3.1%, and roll our target price forward by one year. Our DPU estimates rise by 5-14% for FY10-11. We prefer PLife to Frasers Centrepoint Trust in the short term. Although both could potentially benefit from near-term acquisition catalysts, the likelihood of full debt funding for PLife would make its acquisitions more DPUaccretive, while we anticipate some equity funding by FCT. PLife is also cheaper at 0.89x P/BV vs. FCT’s 0.95x P/BV.

• We believe acquisitions will materialise soon, as the spreads between the cap rates of healthcare assets in the region and dividend yields as well as cost of equity widen, making DPU-accretive acquisitions highly possible. Ample credit facilities and debt headroom point to full funding by debt, rather than equity.

• Buying third-party assets in Japan and Australia more likely than buying from sponsor. Although sponsor Parkway Holdings has a large pipeline of assets, we expect these to be ready only after 2011. On the other hand, cap rates of healthcare assets in Japan and Australia look attractive.

Poised to acquire

• Keen interests seen from investors during our conference in New York
• Clear strategies and downside rental protection are key positive attributes, in our view
• Expect acquisitions in near term, capitalizing on debt headroom and low interest rates
• Reiterate Buy, TP: S$1.37 equating to 26% total return upside

Downside rental protection key attribute. We hosted PREIT at our conference in New York earlier this month to good reception with US based fund managers/investors. The downside rental protection and clear strategies presented by management caught on well with investors. Based on the CPI+1% formula, minimum rental for its Singapore Hospitals are set to grow by 4.36% to at least S$52.7m in its third year of lease (23 Aug ‘09 – 22Aug ‘10).

Acquisitions very likely in near term. We expect management to deliver on acquisitions (funded by debt) in the near term for further growth, possibly scale up in Japan, capitalizing on the yield differential between NPI yield and  cost of funds, and the aging population. Management has already put in place a diversified source of funding (S$500 MTN facility, S$126m untapped bank facilities and S$50m 3-year revolving Murabaha facility).

Expect to trade towards NAV, Buy (TP: S$1.37). We like PREIT for its defensive features, and its opportunity for growth via acquisitions coupled with strong fundamentals – high interest cover of 6.9x, fixed 100% interest rate for debt and high gearing headroom (up to S$963m). We think PREIT could trade up towards NAV of S$1.34 as the REIT sector further re-rates. Revised DCF TP up to S$1.37 (WACC 6.6%) as we adjust our terminal growth rate to 2%, based on an assumed CPI rate of 1% over the long term – still below the average 10 year historical CPI rate (1.4%).